PORT TOWNSEND — A state auditor’s report released Monday warning that the city of Port Townsend is at financial risk comes as no surprise, according to the city manager.

“They aren’t telling us anything we didn’t know,” said David Timmons.

“We were already working on the issue when they first approached us.”

The report, issued by State Auditor Brian Sonntag, states that the city is at risk of not being able to meet financial obligations at current service levels, which could result in the city needing to obtain bank loans or find other sources of funding, which could be an additional cost to taxpayers.

The report also stated that the city is not in compliance with its own financial policies that outline requirements for minimum fund balances.

The state audits are issued annually and are not in reaction to a complaint or request, according to Sonntag spokeswoman Mindy Chambers.

The report said the city has experienced a loss in tax revenues and other financial challenges due to the downturn in the economy, the temporary loss of ferry services in 2007, closure of the Hood Canal Bridge in 2009 and the ongoing stagnation of the real estate market.

It has taken steps to cut costs but not at a rate sufficient to keep pace with the decline in revenues, Sonntag’s report said.

This is reflected by the amount in the general fund, which was at a high of $258,408 in 2006 and a low of $915 in 2009.

The 2010 number, the last available, was $40,930.

“A lot of projects got delayed because of permitting and environmental issues,” Timmons said of the 2009 figure.

“Some other revenues didn’t come in, and we weren’t able to respond until the next year.”

Timmons said the problem is with the general fund, and other city funds are healthy.

The audit report agreed, stating that there were no deficiencies or weaknesses in the design or operation of internal control over financial reporting.

The report recommends that “the city establish a formal written comprehensive plan to address its financial condition [and] should monitor and evaluate the city’s financial position to ensure the plan is followed and the desired results are achieved.”

Timmons said that is already happening.

“We are developing a three- to five-year plan to re-examine the way we deliver city services and will look for ways to pull down payroll expenses,” he said.

This isn’t always possible with employees who are union-represented, but council appointees have already taken on an increased percentage of their own health care benefits, he said.

The plan was scheduled for discussion at Monday night’s council meeting.

Sonntag’s report was released as ballots were distributed for the all-mail Nov. 8 election, which includes two City Council races and a proposed property tax increase — known as a levy lid lift — to pay for fire services.

“Some people will play this for their political benefit,” Timmons said.

“But the statements in the audit report validate what we have been saying all along, that the [levy lid] lift is needed to help pay for services.”

“The audit does not say that we can’t pay our bills,” said City Council member Laurie Medlicott.

“It says we are at risk and must make more cuts and determine if there are projects we can delay.”

Medlicott, who is not seeking re-election Nov. 8, said money earned from the levy cannot be used for purposes other than fire protection and does not directly benefit the general fund, but if there is a shortfall in the fire services budget, the general fund must make up the difference.

She said the poor economy has had a ripple effect.

“First it was the federal government, then the state, then the county,” she said.

“It doesn’t take a rocket scientist to predict that it was going to trickle down to the city.”

Medlicott said the city will no longer be able to support many of the programs that it has in the past, those that made Port Townsend “a wonderful, special city,” she said.

“We could have set back and kept our reserves and not supported Main Street, the YMCA, Dove House and things like that,” Timmons said.

“But we decided to put the money to work, put it back into the community.”